tv [untitled] November 22, 2012 6:00am-6:30am PST
>> as an advocate for pension reform, compiles these types of comparison studies. what i was trying to imply and actually stated, every three years the board goes through this exact process. they use actual positions in the current portfolio and they go forward and model those to try and find out obviously weighing return for risk, what would be the best and most prudent way to sort of change the composition of the portfolio. >> supervisor elsbernd: i'm sorry, jay. i'll get back to you because you mentioned one other thing i forgot to ask when he spoke. risk. we've gone through a big process over the last few years, by our former cao over risk analysis. can you put on the record with a quee are doing at the retirement system. >> as far back as seven years ago there were business plan initiatives that the board
adopted. the main noaks was to learn how to measure risk. the progress we've made is we've purchased software, we've pnch purchased systems in order to measure risk and once we can do that we can monitor risk and the board will have more information under which to make -- >> supervisor elsbernd: not just the board but the public. all of this will be done through the public board and there will be a quantity final number. >> the cao every month, where part of his report is a risk report that shows not only the risk tarkt that has been established and what changes in our portfolio either hiring or firing a manager, changing the composition of the portfolio what impact that has on our risk. right now to date, the risk analysis application has only been implemented across 50% of the portfolio, which is the stocks portfolio. we are -- to get it into the
fixed income portfolio and it will be more difficult because of the nature of alternative investments in real estate to implement it but that's the goal implemented across the entire portfolio to provide like you said information to the board as well aspj( 5÷ to the public. >> supervisor elsbernd: thanks, jay. sorry. >> am i taking that as a no or that you've already -- >> supervisor elsbernd: you're taking it that it's already been done. >> i have never seen a comparison using this model. >> supervisor elsbernd: i understand you disagree with jay's -- >> no. i think he's saying they do their own version of what they call a risk analysis. >> supervisor elsbernd: that's correct. >> so they)2wgxz refused to adds any of the outside studies that do research on pension funds. they only want to do their inside studies. >> supervisor elsbernd: that's not done by inside but go ahead. >> they're inside studies. the other is the investment return assumption and that's actually a factual -- a fact
that we found that the -- yes, the actuary did recommend the 7.66 and 7.50. they recommended it on the basis of a formula that was given to them by the investment -- outside investment consultant. the formula was given to them by the outside investment consultant1u::tn. >> i'm not familiar with what she might be referring to. part of the information that the consultinconsulting actuarial fs obviously their own research regarding the economic information and financial markets. however i mention this asset liability modeling study, this asset liability modeling study comes up with a recommendation after modeling different types of compositions as to what they
would recommend as the preferred model. based on that, the investment side of the house calculates what they think the long-term return would be, stripped out without any kind of excess return, just sort of barebone conservative. the actuary has access to that report, but the responsibility under the board policy to bring forward, for funding purposes -- because again the actuaries are the experts in properly funding a pension. they are not the experts in how to report investment gains and loss. clear. the consulting actuary recommends the -- all the assumptions. they must be approved by thet5fu board in the same way that the retirement board relies on the-ñ consulting actuary to calculate and determine employer contributions. >> supervisor elsbernd: i had just a couple of higher level
questions. seems to me that one of the big assumptions that underpinning this executive summary has to do with drop of the bear market assets shrank from 17.4 billion to 11.1 billion. the question i had, just doing a little research here on the computer, it seems that the overall markets dropped by about 20% during that time period, and our fund dropped well beyond that. and i wanted to just get your sense of is that acceptable, typically when folks think about their own investments you want to at least track the markets if not do better than them, seeing that we did worse than what the overall markets did i want to get your perspective on that and the suggestion there hadn't been a failure analysis and what kind of analyze you've done since 2009 to make sure we're not in that situation again. >> again, as i indicated earlier, we measure once a year, it's a snapshot as of june 30.
from the june 30, 2008 to -- from july 1, 2008 to june 30, 2009, our loss was 21%. but we didn't go from 17 billion. we were not at 17 billion as of july 1, 2008. we were at 17 billion in september of 2007. so the measurement of how far we dropped was from -- not a period at the end. now that being said, we lost roughly 3 1/2 billion. that pjug impacted the valuatiod decisions regarding the funding of the plan -- >> supervisor elsbernd: just so i understand, did we lose more than what the markets lost or that's during the comparable time period if you're comparing apples to apples. >> 21% markets lost, during that discreet period of time we were probably very comparable to what the markets lost. i mean they were not excessive loss2tpid4. comparatively speaking this doesn't help because everyone
lost but we were above the median in public pension plans that have more than a billion dollars and assets which is our measurement for the rierm retirement performance measures. we still lost 27 million. we recovered back to the 15.8 billion -- today we're back to 15.8 billion. not sure what the market did this morning. but we recovered the growth that was lost on those assets. obviously as what impacts the actuarial value of assets, the actuarial value of assets, if as thev7ríñ actuarial value so they're assuming we're investing 16 billion when in fact we're only investing 15 billion. >> supervisor elsbernd: and your perspective on the suggestion of the finding that public funds with low risk investment policies perform as well or better than high risk policies. i know there avagueness in what
that means. >> we can show them studies that show in fact the opposite is true. absolutely the opposite is true. and i think we have a history of being sort of restricted to those types of investments, and i think we have -- the retirement board has always acted as prudently as possible. they have concerns aboutwa( uá preserving obviously the trust. their focus is very, very long-term. i mean it's long-term to the point of we are planning on paying benefits for the person hired today, and all of their continuance. and so contrary to how we handle our own, i don't have an 80 year horizon. i don't have a 100 year horizon but we have i think -- looking back long-term is more significant than looking back at a three or five or 10 year, because it's shown that in fact you can track the actions of the retirement board over that same 20 year period and show that
they were acting priewnelly and that this -- prudently and that this retirement board, twice, since 2008, have undertaken to lower what they call an artificially high assumed return rate, which in fact cost the proposition, with the new proposition, cost the city and employees additional money to make sure that/9::÷ñ we can main the health of the plan. >> supervisor elsbernd: thank you. >> thank you. >> supervisor elsbernd: any other concluding comments? okay. i'd like to invite up either trustee driscoll, trustee -- any comments you'd like to make? >> good afternoon, supervisors. it's a pleasure being here. as you may know i serve as an elected member of the
san francisco retirement board. i'm not serving in that capacity and not speaking for the board here. comments, the freedom of speech which we have so observed earlier in this meeting. first of all, i want to talk about risk. i attend the bicker shir halfway meetings, warren buster is one of my heroes. he told a story if you would have invested when columbus came to the new world, if you could have bought treasury bills and reinvested those at the yields they are now, your dollar would have grown to $1.71 in 520 years. and all of our jaws dropped. i got my calculator and verified that number. warren was right. the short answer is we have to take risk. the grand jury report talks about lower risk. treasury bills is the lowest risk you can get. we have to take prudent risk and i would echo the comments of our executive director. we have a long-term horizon. and we must take prudent risk.
the earlier in terms of the stock market you asked 2008, i believe the stocks were down 38%. our fund was less because we were diversified. we had other asset classes in addition to common stocks. private equity has been one of the investments of the fund in the middle 80's. you asked about the funding. it was much less funded in the early 80's and still we took a much riskier approach. and the returns have been shown opinion forget analysis and studies. one of the best performing asset classes of your pension fund has been the private equity portfolio. it's about a maximum of 15% of the assets. we constrain it. but we must take prudent risk and the returns have been there plp we have a long-term horizon. we don't need the ligdity. we get the liquidity in other ways. another thing about risk that was not discussed but mentioned by the executive director in terms of we come up with different risk and return
numbers for different asset classes. the civil grand jury report led me to emleev that it was proprietary information, we wouldn't disclose that. these are disclosed in public meetings in terms of what is the expected return on stocks, on fixed income, et cetera, and private equity, and emerging markets, those kind of assets classes::t1z and all that goes o it. risk is -- means many different things to different people. to the way we manage people and virtually all over public funds manage money, it's based on two numbers,?e::ñtñ expected returnd standard deviation. and if you want to talk about failure analysis i'll talk about that briefly but the underlying assumption is that the markets are normally distributed. 2008 will happen once every 100 or so years. we have to understand that and that is the price of risk that that would take. but i assure you it's prudent risk. i want to address one other issue.
the phrase failure analysis because it's used throughout the report, i searched it and the definition is this. failure absences is a process of selecting and analyzing data to determine the cause of a failure. it is an important discipline in many branches of manufacturing industries such as the electronics industry, where there's a valid tool, et cetera. doesn't mention investments. there has been no failure. one out of 100 times we'll have markets like that. it's just the way it is. and it could happen again if ben ben ak iruns off with paris hilton. you don't know what will happen but i want to assure you that the fund is managed with taking prudent risk over the long-term and we do care very much about earning returns and protecting the principal. thank you for your attention. >> supervisor elsbernd: thank you. joe. >.hold on just a second. trustee driscoll and then we'll go to public comment. we'll do that after public
comment. >> good afternoon. j)p driscoll also with the san francisco. grand jury report suffered so much ground, so many points it took quite a while to get past some of their misstatements, misrepresentations to get to their findings. my problem is if the basis was incorrect,it takes a while to follow their reasoning. they were nice enough to put in their notes and their attachments all these wonderful articles by groups such as the upjohn people that they use some of that explanation about what they think we should do. so many points but one i want to focus on and followed up on what the commissioner just said we do not follow preservation of capital adequately enough as a number one priority. maybe we don't say it every meeting but we talk about that all the time. that's one. two, in terms of the investment rate of return, there's
assumption that the actuaries make and an assumption the board makes for investment returns. one of the papersxii(sq i think in the upjohn one as said by the grand jury member they expect us to make a realistic rate of return assumption. i agree. very much i agree. part of this -- i won't call it dichotomy conflict the realistic rate of assumptions that make sure that we're not undercharging or overcharging the citizens or the employees. but there's also a reific ad realistic assumption whether we invest, don't char start chaizig returns. it's got to be an attainable return therefore we go through all the steps, what asset classes what subasset classes we're going into. contribution rate that the city the employees must pay. that's two rates of return. they're basically the same thing but both are required to be
realistic and that's what the board spends a great deal of time on and discuss it non-stop. this board has been very realistic. we've had temptations to make more money and have not done it. today if you want a guaranteed preservation of principal as a goal i can tell you exactly what that rate of return will be, something in the neighborhoods of 2%. there are corporations now under incredible stress and strain, not from the economy of how to make their rates of return or their normal profits, but their pension funds are also how are they going to do it with very safe pension funds that are returning 2% of funds. there's a lot of economic pressure on pension funds and trustees and corporations and government officials all over the country. it's our rate of return 7.6 right now realistic yes it is. it's going down and we will review it again and again and again. with that i'll stop. >> supervisor elsbernd: thank you. public comment now. each member of the public will
have two minutes. thank you for your patience. >> it was not as bad as waiting for the muni bus. anyway, i have a statement here and the statements are always my organization. prop c was passed last year in the midst of the economic downturn. today there are signs of recovery with the j.p. morgan stating to maria -- thatr#ãthere are green lights for all section of the economy, jeremy see gull of the wharton business school nile ferguson writing in the november 19 issue noted the u.s. growth in the next four years will be higher than any of the major developed=c97 economies wh unemployment coming down faster. clearly the signs of recovery are written loud and clear with corresponding benefit to the city and its revenues.
this -- is not unlike previous business cycles with slumps and booms, peaks and values except the -- but never in any previous recession have pensioned been attacked. the opportunity for pension attack occurred in this recession is part of a long-term agenda to severely reduce if not destroy these benefits. the upshot of prop c as if workers are going to wake up with a back had eye because they're going to get less benefits and as a result of it they'll have diminishing services causing an economic contraction and for the sake of all pensions have to be preserved and even restored to the previous level for there is an economic safety net for the business and economy without the
goods and services worse recession could occur and possibly depression. so the grand jury is constricted in my point of view and they should start addressing downtown business interests. >> supervisor elsbernd: next card i have is jean thomas actually the only other card i have and then anyone else who would like to comment follow mr. yep and line up on the side. >> thank you. jean thomas, i'm a retired city employee. i have the honor and privilege of being the chair of the committee with the retired employees of the scoint city any of san francisco. i'm not speaking on their behalf but i do follow these what goes on at the retirement board consistently and write it up. and i have to concentrate or otherwise when you put something in writing if you don't do it right you look real stupid. i wonder what kind of world i
live in when i read this report. and particularly i was struck by recommendation 5 as the lower risk of recommendation for investment. wouldn't be able to pay anybody's lunch. so i really feel that the grand jury -- i'm sure they're experiencing great pain today, but in the future, if they go into something like this, they should include, in their group of people with whom they talk and discuss, people who understand some basic ideas ofdv risk and of particularly risk and have a professional background in it. thank you very much. >> supervisor elsbernd: thank you. not yet. mr. yep. and any other members of the public who would like to comment otherwise mr. yep is our final
speaker. >> good afternoon. douglas yep. the first thing i would like to committee was serious about this item, this item -- or really items 5 and 6 should have been heard at the beginning of the meeting rather than items 1, 2, and 3. by holding it last you've actually done a big disservice because everybody's either left or else people have turned off the tv to go shopping. so by holding it last you've, in my opinion, done a great disservice. let's put it this way. item no. 3 was a special interest item, in my opinion. should have been held after these two items. since we're dealing with the subject of trust i'd like to put on the record x, x -- ex-governor core sign of new jersey. let's not forget what happened to all that money and it still hasn't been found.
and whatever happened to the investigation of that. also, if we're dealing with trust, let's not forget the famous athlete lance armstrong. so many people trusted him and now he may become the most disgraced athlete depending on who you want to believe but looks like plenty of obstruction of justice so where we will never get to the bottom of this. i think in order to summarize we should have more hearings on this subject in front of this committee so this committee is serious about audit and oversight, you ought to have more meetings on this very topic, and the last thing i would like to say is that civil grand jury, in my opinion, is one of the few things keeping corruption to some sort of a manageable level in any city. and if you ask me, the only reason why there is so much corruption is because there's not enough crime-fighters to
catch everyone. so i guess -- feel like it's okay to get away with it. thank you. >> supervisor elsbernd: any other members of the public wish to comment? seeing none, public comment is closed. you look like you're itching to have one final word. come on up. >> okay. thanks for my final word. i'm hungry too. i just wanted to clarify that nowhere in our report did we ever recommend that the pension fund invest in t-bills. never. we did not recommend any specific investments for the pension fund. we merely recommended that you investigate the last 20 years of records of other alternative investments. the one that was used by -- to compare cal-pers was bond funds, which made 4%. i think it was mentioned that they only made 1.2% in treasury
bills this year. and what was the return of the pension fund this year. do you remember do you remember, supervisor elsbernd? >> supervisor elsbernd: don't remember. >> i have it here. >> supervisor elsbernd: okay. i think you were about to illustrate the point. please do. i want you to do this. show me. >> 1.67% thisxn'( just saying, we did not recommend that kind of investment, nor any specific investment program. >> supervisor elsbernd: okay. >> we did want -- we still would like to know what the specific formula is for the assumed investment return. we would like to see that formula. thank you. >> supervisor elsbernd: thank you. with that, we'll close the public hearing. why don't we table item 5 and do that without objection. we'll move to item 6. and so let me begin by -- you
know, kind of thanking the grand jury. i appreciate you going after this, but i remember the two of you coming into my office a year ago, right around this time, maybe short of a year -- no, front two, to talk about this. and i remember suggesting to you if you're going to get into this, you've got to get all the way down into the detail because if we end up with a report that is just kind of on the surface, it's going to end up really kind of exploding, causing a lot of controversy when we don't get all the facts. and respectfully,jmr"át investt policy of the retirement system is not something that -- this isn't meant to particularly go to you, but that anybody could truly understand, in 15 pages. i mean this is something that has taken me years on the retirement system to come to understand, and hundreds and hundreds and hundreds of pages of reading.
so i was very concerned when you started asking me questions because i had some sense of where you were going. and while i think you got some of it, there's a lot of the kind of underbelly that takes a lot of research, a lot of evidence, that just can't be answered by a couple of reports that have been produced by a couple pension it. our job now is to say what we agree with and what we disagree with. president chiu, if we could run through these findings and recommendation here are my thoughts, i'm curious for yours, finding one, san francisco employee pension fund is current underfunded by more than 2 billion. i would agree, i think -- suggests that. madam clerk, are you following us as we did through in finding one we disagree with. finding 2, the retirement board
did not complete a failure absences subsequent to the funding loss in 2008-09. i mean there's kind of two ways you could go here. if you buy into the grand jury's concept of what a failure analysis is, sure you could agree with that. but having served on the board, analysis of what happened. did it meet your definition of failure analysis? maybe not because you seem to be caught into one specific definition of what a failure analysis is but i believe the board did a very there are row job of analyzing how the portfolio went down so i would disagree with this finding. >> supervisor chiu: i could go either way on that one. again, i think supervisor elsbernd has laid out the perspectives that there was a lot of analysis but not exactly as the civil grand jury suggested. i think i would agree with them there was a bit of analysis done so i would probably disagree as well. >> supervisor elsbernd: finding three city must pay
increasing contributions to the fund due to underfunding. i think we all agree with that fact. >> supervisor chiu: yes. >> supervisor elsbernd: finding four, the increase in pension contribution by the city are growing at a faster rate than exeand turs on most other city services since 1989. leo, a nod of the head. we will agree with that finding. finding 5, the fund can artificially reduce the city's estimate liabilities by increasing investment return assumptions by increasing years a finding with which i cannot disagree but for the record and anybody who may be watching and we heard it from the grand jury there is no evidence whatsoever that there retirement system ever considered raising the investment assumption solely to save the city money and i would hate for anybody to think that was going on but yes i would suggest we disagree with that finding. finding 6 unrealistically high
assumed investment return rate ofñihqj 7.66% is driv by concr mandate of city contributions with little regard for prudent management. this is a finding i would have to wholeheartedly disagree with. months of hearings that we had at the retirement board on an analyzing our investment return to suggest that it was done with jts regard for prudent management i think you would have had to be in that room with a blindfold on and ear plugs in. we had significant discussion about what it mentd for our pension fund. and quite frankly had very little discussion about what it meant for city contribution and i felt that was appropriate because we are trustees to the retirement system not to the city's general fund. and our job at the pension system as i always understood it as a trustee was to focus as a fiduciary to our beneficiaries, not as a fiduciary to the city's general fund. so i